Your credit score is made up of three numbers, serving as an indicator of your financial history, wellness and responsibility. These three little numbers can spell the difference between approval and rejection for a mortgage, a job, a rental unit and so much more.
We have outlined how your credit score is calculated, why it matters and steps you can take to improve your score.
There are three major credit bureaus in the U.S.: Experian, TransUnion and Equifax. Each one collects and shares information about your credit usage with potential lenders and financial institutions. Most lenders use this information along with the FICO scoring model to calculate your credit worthiness. Some lenders use the VantageScore model instead of FICO.
While there are several slight differences between the FICO and the VantageScore formulas, both scoring models look at the following factors when calculating your score:
The age of your credit.How long have you had your oldest credit card? When was your first loan? An older credit history generally boosts your score. The timeliness of your bill payments. Are you paying all of your monthly bills on time? Chronic late payments, particularly loan and credit card payments, can drastically reduce your score.
The ratio of your outstanding debt to available credit.The VantageScore formula views consumers with a lot of available credit as a liability, while the FICO formula considers this a point in your favor.
The diversity of your credit.Lenders want to see that you have and have had several kinds of open credit. For example, you may be paying down an auto loan, a student loan and using three credit cards.
The trajectory of your debt.Are you accumulating new debt each month, or slowly working toward paying down every dollar you owe?
Your credit card usage.Financial experts recommend having several open credit cards to help boost your credit score, but this only works if you actually use the cards and pay off your bills each month. It doesn’t help much to have the cards sitting in your wallet.
How does my credit score affect my life?
Your credit score serves as a gauge for your financial wellness to anybody who is looking to get a better idea of how responsible you are with your financial commitments.
Here are just some ways your credit score can affect your day-to-day life:
Loan eligibility.This is easily the most common use for your credit score. Lenders check your score to determine whether you will be eligible for a loan.
The larger the loan, the stricter the requirements. A poor credit score can hold you back from buying a house, a car, or getting a personal loan.
Interest rates on loans.Here too, your credit score plays a large role in your financial reality. A higher score can get you a lower interest rate on your loan, and a poor score can mean paying thousands of extra dollars in interest over the life of the loan.
Employment.Astudyby the Society for Human Resources Management found that 47 percent of employers look at the credit scores of potential employees as part of the hiring process.
Renting.Many landlords run credit checks on new tenants before signing a lease agreement. A poor credit score can prevent you from landing that dream apartment or it can prompt your landlord to demand you make a higher deposit before moving in.
Insurance coverage.Mostinsurers will check your credit before agreeing to provide you with coverage.Consumer Reportswrites that a lower score can mean paying hundreds of dollars more for auto coverage each year.
How to improve your credit score
If you’re planning on taking out a large loan in the near future, applying for a new job, renting a new unit or you just want to improve your score, follow these steps:
Pay your bills on time.If you have the income to cover it but find getting things paid on time to be a challenge, consider using automatic payments.
Pay more than the minimum payment on your credit cards.Your credit score takes the trajectory of your debt into account. By paying more than just the minimum payment on your credit cards, you can show you’re working on paying down your debt and help improve your score.
Pay your credit card bills before they’re due.If you can, it’s best to pay your credit card bills early. This way, more of your money will go toward paying down your outstanding balance instead of interest.
Find out if you have any outstanding medical bills.You may have an unpaid medical bill you’ve forgotten about. These can significantly drag down your credit score, so be sure to settle any outstanding medical bills as quickly as possible.
Consider debt consolidation.If you’re paying interest on multiple outstanding debts each month, you may benefit from paying off your debt through a new credit card that offers an introductory interest-free period, or from taking out a [personal/unsecured] loan at South point financial credit union. This way, you’ll only have one low-interest or interest-free payment to make each month. (Note: If you’ll be applying for a large loan within the next few months, it’s better not to open any new cards.)
It’s crucial that you make the effort to improve and maintain your credit score. It’s more than just a number; it will impact your financial wellness for years to come.
Lenders check your score to determine whether you will be eligible for a loan. The larger the loan, the stricter the requirements. A poor credit score can hold you back from buying a house, a car, or getting a personal loan. Interest rates on loans.
In particular, a low credit score may not disqualify you from a loan with a credit union, because a credit union is more likely to take into account your overall financial circ*mstances. However, a good credit score will likely get a lower interest rate.
A credit score is usually a three-digit number that lenders use to help them decide whether you get a mortgage, a credit card or some other line of credit, and the interest rate you are charged for this credit. The score is a picture of you as a credit risk to the lender at the time of your application.
If you fail to repay the loan, the credit union keeps the money. If you make all monthly payments (typically over a term of one year or less), the money—plus interest—is yours, and you'll have added a series of positive payments to your credit reports.
Using more of your credit card balance than usual — even if you pay on time — can reduce your score until a new, lower balance is reported the following month. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed.
PenFed is the easiest credit union to join on this list. It doesn't require you to have any specific affiliation to become a member. If you don't meet Alliant's, BECU's or First Tech's traditional membership guidelines, you just need to make a small donation to a partner charity or organization.
This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.
A 650 credit score is generally considered “fair.” A score in this range may limit you from certain financial opportunities. Payment history, monitoring your credit and lowering your credit utilization ratio can be helpful ways to improve this score over time.
And when it comes to credit, 850 is the highest the FICO® Score☉ scale goes. For more and more U.S. consumers, practice is making perfect. According to recent Experian data, 1.54% of consumers have a "perfect" FICO® Score of 850.
A bank or credit union may refuse to open a checking account for someone who cannot provide the identification that it requests. Tip: If you can't get a checking account because you are listed as having a prior problem with handling a checking account, try another bank or credit union.
Joining a credit union won't help build your credit score on its own, but it can be a good first step toward building your credit. Here are a few other ways that you can build your credit score: Use a credit card cosigner to increase your approval odds. Apply for a secured credit card, which requires making a deposit.
If you repay a balance in full, it can impact your credit score, as your credit utilisation ratio will change, and the mix of credit accounts you use and manage on a regular basis may change too. Any negative impact of this is likely to be short-lived though.
If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt. Plus, using more than 30% of your credit line is likely to have a negative effect on your credit scores.
You need a credit score of 700+ to get a credit card from most credit unions, though some credit unions have options available for people with bad credit or no credit history. There are credit union cards for every credit level, and some of the best credit union cards are only available to people with excellent credit.
Limited accessibility. Credit unions tend to have fewer branches than traditional banks. A credit union may not be close to where you live or work, which could be a problem unless your credit union is part of a shared branch network and/or a large ATM network such as Allpoint or MoneyPass.
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